October 21, 2013

Instead of a Grand Bargain, How About a Little Bargain?

New bipartisan negotiations over fiscal policy are underway, as a result of the deal that ended the government shutdown. But don’t expect these negotiations to produce a “grand bargain” in which Democrats and Republicans each make major concessions.

The problem isn’t President Obama, who would love such an agreement. He has said repeatedly that he would accept entitlement cuts, including a change in the formula for Social Security benefits, as long as Republicans agree to some more revenue and investments in programs he believes would boost the nation’s growth. The problem also isn’t congressional Democrats. They’re a lot more wary of entitlement cuts than Obama is. But both House and Senate leaders have signaled they could support a similar deal, too. And they could probably (although not definitely) get most of their caucus members to go along.

No, the problem is the Republicans. Their leaders have said they won’t even talk about a deal that involves more revenue. They said it earlier in the year—and they’re saying it now. "Unfortunately, every discussion we've had about this in the past has had what I would call a ransom attached to it: $1 trillion in new tax revenues," Senate Minority Leader Mitch McConnell said Sunday on CBS "Face The Nation." "We don't have this problem because we don't tax enough in this country, we have this problem because we spend too much."

So a grand bargain is out of the question. But what about a little bargain? That seems at least a little more plausible.

The reason is budget sequestration—the automatic spending cuts taking place because of the agreement Democrats and Republicans made in 2011. The first set of those cuts took place this year. Another set will take place next year. According to most experts, these cuts are undermining the economic recovery, since it's diverting public spending that would otherwise boost growth and jobs. The cuts are also eroding public services. That means fewer Head Start slots, less money for scientific research, and resource shortages for law enforcement. As David Dayen wrote the other day, sequestration is the equivalent of a partial government shutdown that has been operating in the background, slowing growth, stifling innovation, and stiffing the needy.

Democrats once hoped to reach an agreement that would replace all of the sequestration cuts, which are supposed to last for ten years. But that would require the kind of grand bargain Republicans have rejected. That's why the best hope is probably for a much narrower deal—one that replaces a year or two of sequester cuts, while putting some money into Democratic priorities like transportation infrastructure and maybe a token investment in the president’s pre-kindergarten proposal. Such a deal might also include new revenue, but only a small amount, perhaps as a byproduct of tax reform or some kind of clearly dedicated user fee. (In other words, some kind of tax designated for a specific purpose, in the same way a gas tax is dedicated to transportation.) In exchange, Democrats could agree to a set of “mandatory spending” changes that didn’t touch Medicare and Social Security benefits—say, cuts to farm subsidies or federal retirement programs, or changes in the way Medicare pays for services. Some of these proposals are already in Obama’s 2014 budget proposal. Both the White House and congressional Democrats could go for this kind of deal—depending, of course, on the precise mix of components.

In theory, Republicans should also be interested in this kind of arrangement. They may not be eager to restore sequestration’s cuts to domestic programs, but they should be eager to restore sequestration's cuts to defense spending. They should also have some enthusiasm for more transportation spending, since that money is important in all parts of the country and plenty of Republicans have traditionally supported infrastructure. Republicans might even like early childhood spending, or at least not have a major philosophical problem with it. Some of the most ambitious and intriguing early pre-K programs now in operation are in two deeply red states, namely Georgia and Oklahoma. One other reason Republicans ought to like this kind of scheme is that it would arguably do more to reduce deficits, at least over the long run. Sequestration cuts are set to expire after a decade; at that point, spending on domestic programs would return to previously set levels. Mandatory spending cuts, by contrast, are basically indefinite. Once written into law, they stay that way unless and until Congress changes the law again. So even if the mandatory cuts took place later—as they should—they’d still do much more to improve the country's long-term fiscal outlook.

That was the argument some experts and advocates were making over the summer, before the shutdown and debt ceiling crisis. At the time, Obama was meeting occasionally with a group of Republican senators and the possibility of some kind of bipartisan agreement to replace the sequester, or part of it, seemed significant. But publicly at least, Republicans are saying they’re not interested in that kind of swap. They’ve suggested they would agree to stop sequestration cuts for only in exchange for major entitlement benefit changes. That’s simply not a trade that Obama, Nancy Pelosi, or Harry Reid would do, because they would feel (rightly, in my view) that Democrats would be giving up a lot more than the Republicans. (Reid said as much last week.)

But it’s early—and it remains to be seen whether Republicans can really stick to their position. Plenty of Republicans, particularly in the Senate, are extremely nervous about the coming cuts to defense spending. They’re also worried about the way sequestration sets domestic spending, although they're reluctant to admit it. Over the summer, House leaders had to yank a transportation-funding bill because even some Republicans thought the spending level was too low (even though others, affiliated with the Tea Party, actually that it was too high).

These sentiments may not be enough to get the Republicans to budge. Particularly in the House, Tea Party Republicans and their allies are opposed to undoing any cuts, even if it’s for the sake of making more permanent cuts later. They feel the same way about government spending, even if it’s for relatively non-controversial purposes like transportation. But these lawmakers represent a minority, even within their own party. Maybe their opinions wouldn’t carry the day again. It's not likely, but it's not impossible.